What is this?
‘Opportunity cost‘ is the benefit that is missed or given up when you choose one alternative over another.
If you like to assign values to things, as economists are wont to do, then you might define it as:
the value of the most valuable choice
out of those that were not taken
Whether money, time or emotional energy, everything you do has a cost.
The opportunity cost is not just what you are spending directly on your decision, it is what you no longer have available to spend on anything else.
Here’s a rather good video on the subject.
How is this useful to me?
Consider the opportunity cost of every decision, and it will help you become a more strategic thinker, always seeing the bigger picture.
This heightened awareness can be of great help in staying on track to achieving your goals.
A call center worker is taking evening classes to qualify as a reflexologist, with the ambition of eventually leaving their current job to become a self employed, mobile therapist.
With a holiday to save for, they decide to work extensive overtime hours at the call centre.
The extra hours brings in the money they need to book their holiday, but they’re now too tired to focus properly during their evening lessons, nor to study at the weekend.
The opportunity cost of the holiday & overtime, is the steady progress they had been making towards their objective of changing careers.
A hairdresser & beauty therapist runs a busy salon with limited space. The side of the wall next to the reception is taken up with a a range of branded hair products. The products sell reasonably well and generate a steady if unspectacular profit every week.
Considered in their own right, this would be a sound business decision. Profit = good. Therefore, continue as is!
An opportunity cost mindset on the other hand, would prompt them to consider:
“What is the best possible use of that space?”
Conscious that there is probably something better out there, they keep an eye out, and eventually settle on a nail stand that they see in another salon, that will generate even more income (even after allowing for setup costs).
Best used with…
In order to use opportunity cost to its full potential, you should be clear as to what your objectives are.
What is your overall gameplan? Where do you want to be in a year’s time? What is really important to you?
When you know what your most important objectives are (ideally decided during a planning session), the opportunity cost principle helps you to keep focused.
Applying opportunity cost = letting a second-best option pass by in order to achieve the top priority.
Other useful Minutes
Bite sized guides to concepts that could help you attract clients, reduce costs, or run your wellness practise more efficiently:
- A few minutes to understand… business systems
- … cash flow
- … Key Performance Indicators (KPI’s)
- … the marketing funnel
- … the Planning Principle
- … profit & loss